The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets

ABSTRACT

A series of experiments illustrate that relaxing short‐selling constraints lowers prices in experimental asset markets, but
does not induce prices to track fundamentals. We argue that prices in experimental asset markets are influenced by restrictions
on short‐selling capacity and limits on the cash available for purchases. Restrictions on short sales in the form of cash
reserve requirements and quantity limits on short positions behave in a similar manner. A simulation model, based on DeLong et al. (1990), generates average price patterns that are similar to the observed data.